What are B and C Notices?
B and C notices are notifications issued by the Internal Revenue Service (IRS) to payers and payees regarding discrepancies in taxpayer identification numbers (TINs) and not reporting certain payments required to be reported to the IRS. These notices aim to address potential errors or inconsistencies in the taxpayer’s records and ensure accurate reporting of income and tax liability. B Notices are also known as Backup Withholding Notices, while C Notices are referred to as Notice of Proposed Civil Penalties. Both types of notice require prompt attention and appropriate action to avoid further consequences.
For B Notices, the IRS will issue a CP2100 or CP2100A Notice if the payee’s TIN is missing or noticeably incorrect (for example, if the TIN is not 9 digits or contains something other than a number) or their name and TIN on the information return filed does not match the IRS’s records. A CP2100 Notice is issued if you file 50 or more information returns that have errors. A CP2100A Notice is issued if you file less than 50 information returns that have errors. There is no difference in the type of information or instructions in the CP2100 Notice and the CP2100A Notice.
These notices inform the payer that a name/TIN mismatch has occurred and backup withholding is required and should be applied to future payments made to the payee until the TIN discrepancy is resolved. To address a B Notice, the payee must provide the correct TIN to the payer in the required manner (i.e., depending on whether a 1st or 2nd B notice is received) within a specific timeframe and begin backup withholding, if applicable. Remember, even if a payment or payee is not reportable, you do have to report the payee on a Form 1099 if you backup withheld at any point during the year.
With respect to C Notices, the payee may become subject to backup withholding if the payee fails to fully report all interest and dividend income on the payee’s tax return, file a tax return including all interest and dividend income you received, or certify, under penalties of perjury, that you’re not subject to backup withholding for interest and dividend for accounts that were opened after 1983. The IRS will send at least four notices over a period of at least 120 days asking the payee to correct the unreported or underreported interest and dividend income on the payee’s income tax return. The final notice tells the payee that you’re subject to backup withholding and the IRS will notify your payers to start backup withholding immediately. It is crucial to file any missing tax returns and report the correct amount of interest and dividends and amend previously filed tax returns to report the correct interest and dividend income. Upon receipt of a C Notice, a payer must begin backup withholding until the IRS notifies the payer to stop.
What do I do if I receive a B or C-Notice?
For B Notices, for TINs that are missing or are noticeably incorrect, first determine if you are already backup withholding on the account. If you are not, then you should begin backup withholding immediately. You also must make up to three solicitations for the TIN (initial, first annual, second annual) to avoid a penalty for failing to include a TIN on an Information Return (e.g. Forms 1099). For incorrect TINs that don’t match IRS records, compare the accounts on the listing with your business records. If they agree, then send the appropriate “B” Notice to the payee. If an account does not agree, this could be the result of a recent update, an error in the information you submitted, or an IRS processing error. If this is what happened, then the only thing you should do is correct or update your records.
For C Notices, start backup withholding at the current backup withholding rate which is currently at a rate of 24 percent. You should stop backup withholding when the IRS notifies you that the taxpayer is no longer liable.
In both cases, it is essential to take these notices seriously and promptly respond to the IRS. Speak with your tax advisors on next steps and note, ignoring or neglecting these notices can lead to further penalties, fines, and potential legal consequences. It is advisable to seek professional assistance from a tax advisor or an attorney experienced in IRS matters to ensure proper compliance with the notice requirements and resolve any issues effectively. By addressing B and C Notices diligently, payers and payees can avoid unnecessary complications and maintain compliance with IRS regulations.
Can I avoid getting B and C-Notices?
For B-Notices, simply put, yes. IRS TIN checking plays a crucial role as part of your W-9 validation process, which is key to reducing B Notices. As we mentioned in our prior post, Electronic Form Collection Can Reduce Withholding & Reporting Penalties, automating the collection and validation of Forms W-9 at the time of onboarding/receipt will allow you to know at the time of onboarding whether the TIN that has been provided matches with what the IRS has on file. If not, you can do a few things, like withhold on the payment until a valid TIN is provided, if possible, or backup withhold at a rate of 24%. Either way, you now know the TIN is invalid and you can request new documentation with a valid TIN well ahead of reporting season.
In addition, collecting tax documentation such as Forms W-9 electronically can provide peace of mind that information being submitted on your information returns is correct and that you are complying with your reporting obligations.
You can find out more about the IRS TIN matching program here.
From a payer perspective, it is difficult to reduce the occurrence of C-Notices as you are at the mercy of the taxpayer to report their interest and dividend income.
For more information Comply’s first-in-class electronic forms collection application, eForms, contact us at firstname.lastname@example.org. Make sure to follow Comply Exchange for more industry updates and subscribe to the Comply Connect for a full industry round-up at the end of each month!